(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)
Wrapping Some Numbers Around Valeura's Thrace Basin Potential
I'm getting a lot of questions from people wondering about the "size of the prize" in the Thrace Basin for Valeura and Statoil. I'll put some numbers forward here for consideration, but I'd like to emphasize that these figures are only generally illustrative given the limited data available thus far, so treat them as being truly back-of-the-envelope and highly speculative in nature. With that caveat in mind, here's what I count at night instead of sheep...
Typical Montney original gas in place (OGIP) numbers range anywhere from 50 BCF/section to 150 BCF/section. Given that the depths and porosities that Valeura and Statoil are dealing with in the Banarli blocks are largely comparable to those of the Montney in Western Canada, I think that the comparison is useful. Those 50-150 BCF/section Montney OGIP numbers are based on gas pay thicknesses ranging from 50 metres to 150 metres (link to an article on this here). So, running with the Montney as a comparable, what's in play within the potential BCGA within the Banarli blocks?
As you'll recall, Valeura noted 128 metres of "net pay" within the Teslimkoy section that they drilled in the Yayli-1 well. As I pointed out in yesterday's note, Yayli-1 was drilled on the edge of this potential BCGA that has attracted Statoil's interest. Right away, you should be asking yourself what Statoil is doing farming into in play like this... what brought them in? If a company of their size is taking a shot at this, it must be a big prize, right? If I run with the 150 BCF/section OGIP number for the overpressured section of interest, I think that's a pretty safe assumption. The sedimentary package of interest in the Banarli block actually reaches some 1500+ metres in thickness in the deepest parts of the basin, so running with numbers based on 150 metres of gas pay per section is probably not a bad starting point... especially if Yayli-1 already found 128 metres on just the edge of the play (some images at the bottom of this note serve to drive that point home).
The Banarli blocks cover roughly 540 square kilometres, which is equal to roughly 210 sections (1 section = 1 square mile). Now, I'm not going to say that 210 sections will all be productive, but is it crazy to think that 1/4 of them would be? Say, 50 sections worth? Probably not a bad starting point for back of the envelope math in my mind. So 50 sections at 150 BCF/section OGIP gets you to 7.5 TCF OGIP. Recovery factors in tight gas plays of around 20% are completely reasonable in my experience. Again, I want to emphasize that I am making a lot of assumptions here, but I do think that my math is useful for illustrating the scale of the target that's in play here. Using a 20% recovery factor on 7.5 TCF OGIP implies a potential recoverable gas prize of 1.5 TCF (TCF = trillion cubic feet). I suspect that both Statoil and Valeura have done similar math, though neither organization has anything to gain by promoting pie-in-the-sky numbers like this at such an early stage of the proving out of the play.
I'm putting this straw-man estimate together for readers because I have a lot of people asking me what's in play here and this is the simple math that I use when I think about what's on the table. Obviously even 50% of 1.5 TCF would be a welcome prize for Statoil (and hence be highly material to VLE) and I could certainly go on to make the case for even more bullish OGIP/section numbers towards the centre of the Thrace Basin... but I'll leave that for when more data is available. My point here is that given the data at hand, I think I have a good idea of the scale of the prize. I'm playing for dollars, not dimes or quarters. VLE has almost no institutional following yet, but as I mentioned yesterday, I think that we are in the very early stages of VLE's profile being raised to the institutional level. With Statoil coming into the play, I would suspect that we'll see more companies taking a hard look at the Thrace with some even trying to muscle in on the edges of the play... which will in turn drive even more interest over time. Luckily VLE was first to the party and has acreage spanning from the edge of the potential BCGA all the way to its thickest parts, with more licenses under application. This play has company-maker scale.
When you're very early on a story, the uncertainty and lack of broad market consensus requires a certain degree of resolve to stick with a name. I find that when I run through the numbers I have plenty of resolve these days, especially when a company of Statoil's stature apparently sees the same thing that I do. The structure of the deal with Statoil sets Valeura up to continue running a growing shallow gas business with a growing target inventory... and that lets me sleep at night after counting all of those TCFs.